Risk & Economy » Regulation » Japan’s economy shows remarkable stoicism following the tsunami

It is hard to resist gawping at the images of incomparable devastation: tankers wedged between family homes and whole harvests pulled from their fields on a torrent of seawater set the scene in north-eastern Japan, after an earthquake measuring 9.0 on the Richter scale and a resulting tsunami struck on 11 March.

It is too early to put a figure on the cost to business, to government and to Japanese society of its largest-ever recorded natural disaster, though an estimate from Credit Suisse puts it around ¥14-15tn (£113bn). That is a large figure, but dwarfed by Japan’s pre-existing public debt of around $10tn, and many analysts agree that its sovereign credit ratings of AA (Standard & Poor’s) and Aa2 (Moody’s) are not likely to be downgraded as a result of the disaster.

Citi estimates the damage at ¥10tn (£76bn) but says reconstruction efforts could actually see Japan outperform fiscal expectations for 2011: a ¥1m spend on rebuilding in the second half of the year could help Japan outperform Citi’s 1.9 percent fiscal growth projection for 2011.

That may all change: the Guardian reported more than 38 separate earthquakes around Japan four days after the original quake, and the country is struggling to contain potential nuclear disaster at a power plant hit by the tsunami, requiring extensive evacuation.

Business as usual?

Showing remarkable stoicism, many businesses and stock exchanges in Japan continued to trade normally in the days after the disaster. The Tokyo Commodities Exchange and the Osaka Securities Exchange (OSE) held its usual night trading sessions, while the OSE was open on the Monday following the earthquake.

“Datacentre and network providers say the earthquake and resulting tsunami have not affected their facilities or connectivity,” wrote Sell-Side Technology, a news service. BT said its local staff is safe and its servers experienced only minor delays. Google sprang into action over the weekend after the disaster, launching a tool to search for or upload information on missing people, and received heavy traffic. And according to risk modelling agency AIR Worldwide, reinsurers may absorb up to £34.6bn of the costs, but their balance sheets should only take a modest five percent hit.

Despite the devastation, analysts are optimistic about the country’s chances for recovery of output. ShareCast reported that the four prefectures most severely hit by the tsunami and earthquake contribute 6.2 percent of Japan’s “gross prefectural production” and 7.2 percent of manufacturing output. It estimates that country-level industrial production in March will shrink by only a few percentage points if production levels fall between 20-40 percent. About one-fifth of the world’s technology products are made in Japan, but ports have held up well considering the damage they have sustained. However, Korean shipbuilders and American solar power companies are among those facing the most significant business interruptions, according to the newspaper International Business Times.

Few analysts think an all-out economic slump is likely and most believe that Japan’s previous schedule to exit its current economic lull in 2011 will still happen – but later. “We expect solid economic recovery to be confirmed in October-December,” a Nomura analyst report said.

Meanwhile, video footage of fire crews and emergency services vehicles racing to rescue people and tackle power station blazes shows how well placed Japan is to respond to catastrophic interruptions to infrastructure.

“Earthquakes usually have a negative economic impact in the short term and a positive impact in the long term,” says Nomura. But no one predicted or prepared for something of such a magnitude that it shifted the entire country almost four metres eastwards.